Austrian School of Economics: Revisionist History and Contemporary Theory

10. The Gold Standard in Theory and Myth

The mythology of gold really grew up with Keynes and the quantity theory. Here are six of those myths: the gold standard is unable to accommodate the needs of an growing economy; the quantity of money is arbitrarily determined; the gold standard is a government price fixing scheme; the gold standard subjects a country to alternating inflation and deflation; the gold standard requires high costs devoted to resources; and the gold standard results in high interest rates.

Basic supply and demand analysis in most cases will show us that these are myths. Having refuted all six myths, Salerno turns to a few gold standard proposals.

Supply siders want a gold standard, but they want plenty of money, a fixed price of gold, and a target reserve amount of gold. This monetarist concept does not allow gold to be a real medium of exchange.

Hazlitt, Hulsmann, Senholz, and Tmberlake supported a non-monetarist approach called a parallel private gold standard. Don’t get rid of the fiat, just freeze the Fed action and the monetary base. Then convert reserve accounts into Fed notes. Give a proportional amount of Fed-held gold to each citizen. Abolish legal tender laws and make gold contracts in gold enforceable.

Salerno and Rothbard object to this plan, unless a link between dollars and gold is established as a way to go back to gold.

Mises’ plan went further than the currency school. The currency school forgot that checking account money was also part of the money supply. Mises wanted the freedom to buy and sell gold, and allow after three months conversions of dollars back into gold through conversion agencies. The Fed could not interfere. The dollar is defined legally as a weight of gold.

Rothbard’s plan was to get rid of the Fed and reprice the gold. Take the total amount of currency and divide into that the total ounces of gold owned by the Treasury to get a price per ounce. Then call in all fed notes and turn them in at that rate. There would be a one-off inflation and it would still be a fractional reserve system. Another plan yields no inflation and 100% backing.

Lecture 10 of 10 from Joseph Salerno's Revisionist History and Contemporary Theory.